Financial Service Agency The Working Group on Payments and Transaction Banking of the Financial System Council Financial Services Agency Institutional Framework for Financial Groups Final Report by the Financial System Council あ Final Report: Institutional Framework for Financial Groups Presented to the Minister for Financial Services by the chairman of the Financial System Council December 2015 This report is a provisional translation of original Japanese version. Contents Introduction 1 Chapter 1. Business Management of Financial Group 2 Section 1 Situation around business management of financial groups 2 (1) Megabank groups 2 (2) Regional bank groups 3 Section 2 Principle of desired business management style 3 Section 3 Ensuring the effectiveness of group-wide business management 4 (1) Functions required for group-wide business management 4 (2) Issues associated with the Companies Act 4 (3) Information sharing 5 Chapter 2 Consolidating Common and Duplicate Operations within a Group 6 Section 1 Principle 6 Section 2 Regulations on consolidation of common and duplicate operations 7 (1) Consolidating common and duplicate operations into a holding company 7 (2) Consolidating common and duplicate operations into a subsidiary 7 (3) Facilitating financing within a group 8 (4) Facilitating provision of banking services by an entire group 9 Chapter 3 IT and Payment-related Operations by Financial Group 11 Section 1 Principle of regulations on permissible activities of financial group 11 Section 2 IT and payment-related operations 12 (1) Facilitating investment in finance-related IT companies 12 (2) Facilitating commission of operations related to payments and transaction 14 banking to a party within or outside bank groups (3) Issues associated with participants in banking business from different industries 15 Conclusion 16 Institutional Framework i for Financial Groups The "Working Group on Financial Group" of the Financial System Council List of Members A As of December 22, 2015 Members Shinsaku Iwahara (Chairperson) Hiroyuki Kosuzu Koji Fujiwara Professor of Law, Waseda Law School A Head, Financial Research Managing Executive Officer, Department, Mizuho Financial Group, Inc. Mizuho Research Institute, Ltd. Sadakazu Osaki Zenji Nakamura Koji Funatsu Head of Research, Center for Strategic President and Representative Director, Associate Professor, Faculty of management & Innovation, UBS Securities Japan Co., Ltd. Law, Doshisha University Nomura Research Institute, Ltd. Representative in Japan, UBS AG, Tokyo Branch Japan Country Head, UBS Group Yuri Okina Hironari Nozaki Hideyuki Matsui Vice Chairman of the Institute, Professor, Faculty of Social Professor, Faculty of Law, The Japan Research Institute, Ltd. Relations, Kyoto Bunkyo University Rikkyo University Takahito Kato Akio Hayashida Katsuhiro Miyamoto Associate Professor, Graduate Schools Vice Chairman of Editorial Board, The Managing Executive Officer, of Law and Politics, Yomiuri Shimbun Nippon Steel & Sumitomo Metal University of Tokyo Corporation Kenichi Kawamura Shin-ichi Fukuda Nobuyoshi Yamori Director and Managing Executive Professor, Graduate School of Professor, The Research Institute Officer, The Bank of Yokohama, Ltd. Economics, University of Tokyo for Economics and Business Administration, Kobe University Hiroyuki Kansaku Fumiyo Fujii Ken Yoshizaki Professor, Graduate Schools of Law Managing Director, North Pacific Bank, Senior Vice President, Managing and Politics, University of Tokyo Ltd. Director of Financial Business Department, NTT DOCOMO, INC. Observers Toshikazu Takebayashi Toshiya Takano Shinichiro Hayashi Counsellor, Civil Affairs Bureau, Director, Financial System Deputy Director-General, Financial Ministry of Justice Stabilization Division, Minister's System and Bank Examination Secretariat, Ministry of Finance Department, Bank of Japan ii Institutional Framework for Financial Groups The working group invited the following persons in addition to those listed above to exchange opinions. The 2nd meeting (May 26, 2015) Hidekatsu Take Toru Nakashima Junichi Hanzawa General Manager, Strategic Planning General Manager, Corporate Planning General Manager, Corporate Division Mizuho Financial Group, Department Sumitomo Mitsui Planning Division Mitsubishi UFJ Inc. Financial Group, Inc. Financial Group, Inc. The 3rd meeting (June 16, 2015) Hideto Tago Director General, The Research Institute of Japanese Regional Economy (RIJRE) The 4th meeting (June 29, 2015) Kazuhito Ikeo Professor, Faculty of Economics, Keio University (Honorifics omitted) Institutional Framework iii for Financial Groups あああ Introduction The business environment surrounding Furthermore, in a global view of financial Japanese financial groups centered on banks groups operating worldwide, there is a trend is exposed to drastic changes. Rapid that the soundness of the entire financial progress of IT (information technology) group should be supervised through its innovation represented by so-called holding company in a responsible manner by FinTech1 that integrates finance and IT can home regulatory authorities in the country significantly impact the future of financial where the holding company is located. services including payments. While Western financial institutions are stepping up In view of these circumstances, on March 3, strategic responses to these environmental 2015, the Minister of State for Financial changes, it has become a key issue for Services referred the following issue to the Japanese financial groups to make efforts general meeting of the Financial System toward the promotion of innovation in Council: “Based on the environmental various financial service sectors in order to changes, including the progress of keep up with these global competitors. diversification and internationalization of In view of the situation of financial groups, financial groups, the study of the megabank groups show that their domestic institutional framework on financial group subsidiaries in non-banking businesses and should be made.” In response to this, the foreign subsidiaries tend to increase their Financial System Council set up “the shares in the group income, while turning to Working Group on Financial Group of the local regions, some regional banks are Financial System Council” and has held nine moving toward a cross-prefectural bank meetings since May 2015. Interviewing integration, leveraging their holding concerned parties, they discussed the issue companies. Both megabanks and regional from perspectives of the enhancement of banks are entering a new phase respectively business management functions of financial in response to these global and local groups and their strategic and flexible changes in economic and financial business operations on a group-wide basis. environments. This report summarizes the results of the study by the Working Group. 1 FinTech is a coined word that combines “Finance” and “Technology,” referring mainly to innovative IT-based financial services. Particularly in recent years, IT venture businesses mainly in overseas markets are becoming more active in providing innovative financial services, utilizing their IT. These services are not provided by conventional banks and other financial institutions. Institutional Framework 1 for Financial Groups Chapter 1: Business Management of Financial Group 1. Situation around business group-wide business management by management of financial group placing main companies such as banks, securities companies, and trust companies in parallel under the holding company and Financial groups formed under a structure becoming the direct shareholder of those with the holding company as top-tier companies. Another example is that company in their organization can be although main companies are placed under categorized into two main types. One is the direct umbrella of the holding company, megabank groups whose structure is topped some other main companies are placed by the holding company that has a variety of under a core bank as the core bank’s business subsidiaries at home and abroad, subsidiaries (i.e. sub-subsidiaries to the including banks, securities companies, and holding company), and the core bank plays trust companies. The other is regional bank somewhat a prominent role in business groups that have several banks and management. In addition, as to small- or subsidiaries under the holding company. medium-sized subsidiaries in a group, it depends on each group whether they are placed under the direct umbrella of the (1) Megabank groups holding company or placed as sub-subsidiaries. Among large-scale financial groups typified In view of forms of corporate structure of by megabanks, each group makes efforts the holding company and its subsidiary toward enhancing group-wide business banks of each group, some holding management functions2. companies have a nominating committee, whereas others have a committee of board Meanwhile, the specific styles of business of auditors. Besides, some of financial management of each group are not groups have an optional committee not necessarily identical. based on laws. Subsidiary banks of every When it comes to the group structure group are a company with a committee of (comprising entities), one example is that board of auditors. the holding company plays a central role in a 2 Institutional Framework for Financial Groups With respect to groups’ actual operations, to 2. Principle of desired business a greater or lesser extent, there are many management style cases where officers and employees